Very few businesses remain under family control into the third generation. There may be lack of succession in the family, or one of the dreaded three Ds – death, disability or divorce – might result in a need for a sale. Or it might simply be that you’ve had enough and want to cash-up, retire and travel the world. Whatever the reason for that ‘For Sale’ sign going up, the earlier you plan for the day, the better for you and your heirs.
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A carefully considered exit strategy provides the basis for an action plan to maximise the value of the business. Rising food prices mean that international investors are showing keen interest in agriculture. When it’s time to sell your farm, the best buyer will probably such an investor. Keeping this in mind as you build the business will stand you in good stead.
Large family homes are of little value to such buyers. There are better ways of providing for these comforts where money invested is ultimately able to generate a return. Sticking with your ‘core competence’ is a maxim serious investors treat as gospel. By keeping focused on the crop or product best suited to the farm location, the most value will be added to the business. Diversifying, as I’ve been tempted to do more than once in my own farming life, adds little value.
Get big in one or two products and ‘do them well’. This is what sells, not a mish-mash of crops which adds complexity and generates little or no profit. In addition, always try to keep some growth potential up your sleeve. Buyers are always attracted to growth, and will pay a premium if it’s around the corner.
Succession
Never forget that the spark that ignites business and brings profit is management. All the good soil, sunshine, water, finance and markets in the world mean nothing if it’s not pulled together by skilled management. What will you be able to offer the potential buyer in this regard? Do you have successors in place at all levels to run the business smoothly without your presence?
If not, do you have an operations manual which sets out, step by step, the key managerial tasks required, and can you provide a period of training and mentoring for the buyer’s management team? If you’re going to get the best value for the business, don’t put the farm on the market until you can assure the potential buyer of management succession. Also, nothing will scare a buyer away more quickly than a messy set of unaudited accounts with all sorts of off-balance-sheet benefits claimed by the owner.
Audited financials create a professional image for selling your business (at least three years of audited books are best). Keeping a business positioned for sale means keeping the books in a constant state of readiness for perusal by a potential buyer. All privately held businesses have a variety of expenses incurred by the owners, which are unrelated to production and lead to increased costs and lower profits.
That’s understood, but before claiming these, ensure you have authentic supporting documentation. Finally, know the value of your farm at all times. Prepare and maintain a five-year projection and calculate the fair value of the farm based on future cash flows. Track all farm sales in your industry and area. What prices have comparable farms realised? Have your farm professionally valued every three years. If someone unexpectedly arrives with an offer way above what you know the value to be, it may be the time to sell.
Contact Peter Hughes at [email protected]. Please state “Managing for profit” in the subject line of your email.
This article was originally published in the 15 February 2013 issue of Farmer’s Weekly.
